Seasonality in Dynamic Consumer Inventory Models
Abstract: Previous studies have found that forward looking behaviour plays an important role in the decisions consumers make when purchasing storable goods. Static demand models have been found to overestimate price margins by as much as 30 percent. In dynamic models of storable goods, forward looking consumers make their purchasing decisions based on the observed prices, and their current inventory. Because the inventory of each consumer is typically not observed, estimates of the inventory are constructed from the consumers observed purchases and presumed consumption. To estimate consumption, inventory models have assumed the expected desirability or consumption of the good is either constant, or follows a Markov process. However, these assumptions are not be appropriate for goods that are more desirable at certain points through the year.
In this paper, I estimate a dynamic inventory model that accounts for seasonal shifts in consumption utility in the condensed soup industry. To estimate the model, I introduce a cyclic nested fixed point algorithm, which reduces the computational burden caused of adding seasonal variables to the state space. I apply the findings of this model to calculate optimal pricing policies when demand is seasonal and consumers are forward looking.
A Competitive Model of Ranking Agencies
This paper investigates a phenomenon of multiple ranking lists on the same performers. In the model, two ranking agencies each compile a list to rank a set of performers for an audience. The audience weighs the two ranking lists by how much each list is promoted aggregately by performers, and formulates a perceived ranking for each one of them. In order to boost their perceived rankings, performers decide which ranking list to promote, and how much to spend on promotion. Ranking agencies intend to maximize the aggregate promotion devoted to its own list by performers. In equilibrium, the two ranking agencies will choose two lists that maximize the biggest ranking difference. In response, only the performers enjoying the biggest ranking difference promote the corresponding list, and other performers free-ride.
Seller Diversity on a Two-Sided Platform
As two-sided markets flourish, platform owners face the problem of governing seller diversity. In this paper, we use the circular city model to study seller-side variety and quality heterogeneity and evaluate the platform’s governance strategy. An increase in variety improves matching of sellers’ products and buyers’ preferences; meanwhile, it alters competition among sellers, hence their pricing strategies. Interestingly, under certain conditions, an increase in variety may reduce consumer surplus as a result of sellers’ pricing strategies, which contrasts with the positive network effect discussed in the literature. The effect of variety on seller-side competition also suggests that it is optimal for the platform owner—who earns a share of sellers’ profits—to restrict variety within a threshold to mitigate competition intensity. We further incorporate quality heterogeneity in the circular city model and derive closed-form solution of the equilibrium outcome. The results show that quality heterogeneity leads to higher profits for the platform. Furthermore, rather than offering uniform support that increases the average quality, an effective strategy for the platform is to offer discriminatory support to sellers to enhance quality heterogeneity.
Unpredictable demand and the low success rate of new product launches in the motion picture industry prompts studio executives to continuously seek to improve returns on investment by better managing key product development processes of a film. In the early stage of film development, it is imperative to understand the means by which members of the development team may contribute to the success of a new film. Prior research proposes star power, which relies on the perceived bankability of specific team members, as a determinant of film success. In this research, we propose the construct of network power to capture the component of team members’ contributions that arises from their prior collaboration experiences in the film industry network. We identify and test three important aspects of network power: cohesion, positional embeddedness, and junctional embeddedness. Analysis of two decades of collaborations and box office revenues of films shows that network power is significantly linked to film commercial success. In particular, cohesion within a film development team exhibits an inverted-U shaped relationship with box office revenue, suggesting the presence of an optimal volume of prior collaborations among team members. Our findings also reveal that embeddedness aspects of network power carry unique significance across functional roles, pointing to the assembly of a “dream team” including on-camera talents who are connected to other well-connected industry players (high positional embeddedness), off-camera talents with connections that bridge industry sub-communities (high junctional embeddedness), and a producer who possesses both of these qualities.
Retail Amenities and Urban Sprawl
This paper examines the interaction between local retail markets and population density in cities. We demonstrate that welfare costs of urban sprawl need not come only from road congestion or environmental externalities, as often suggested in the literature. A city also forgoes potential agglomeration economies in retail, when it settles into a spatially sprawling equilibrium. Our theory predicts an additional spatial equilibrium where the city is inefficiently dense, characterized by strong retail agglomeration economies within the core. We use the model developed to show that urban welfare is higher when retail taxation is used to fund cross-city transit improvements in a balanced-budget manner. This result supports the common use of local retail taxation as a funding mechanism for urban transportation projects in the United States.
Periodicity of Pricing and Marketing Efforts in a Distribution Channel
Most research about cooperative advertising programs in distribution channels relies on the assumption that manufacturers and retailers decide of pricing and marketing efforts simultaneously. This paper evaluates this central assumption and investigates the optimal periodicity of pricing and marketing effort (ME) decisions for a distribution channel. We develop a game theoretic model that accounts for pricing at each level of the channel, for the manufacturer’s ME mix strategies (a direct ME to consumers and coop advertising program offered to the retailer) and the retailer’s ME as well. We obtain solutions for a bilateral channel under different vertical interaction scenarios; when the channel is led by the manufacturer, the retailer or when channel members decide simultaneously of each of their marketing mix decisions (vertical Nash). We compare the effect of pricing and ME decision periodicity on outputs for each channel member. The main findings suggest that simultaneous decision-making of pricing and ME is optimal only for high enough levels of the manufacturer’s ME effects. For very highly effective marketing efforts, sequential decision-making of pricing and ME allows channel members to implement equilibrium strategies and achieve maximum profits that wouldn’t be achieved with simultaneous decisions. This highlights the importance of relaxing the simultaneous play assumption of pricing and ME in a distribution channel.
Do You Diet by Drinking Diet Drinks? – An Empirical Study of Food and Drink Choices at Restaurants
Diet drinks as a functional food has been introduced to help consumers to lower their caloric intake. Critics in recent years have suggested that these drinks are in fact harmful to consumers as they can use these drinks as a ‘crutch’ to consume more calories. In this paper, we use a novel panel dataset from Canada (2002-2007) to study the effects of drink choices on overall caloric intake at a major fast-food chain. Detailed meal specific individual level daily food and drink intake data help us to estimate differences in caloric intake conditioned on the choice of drinks (i.e., regular vs. diet carbonated soft drinks (CSD)) and size (i.e., small, medium and large) by consumers. We estimate the difference across different demographic groups by treating choice of drinks and sizes as treatments and using econometrics of heterogeneous treatment effects estimation techniques. The within subject design of our estimated model helps us avoid some of the usual endogeneity concerns in estimation due to self-selections in drink type and size. While we did not find significant overall effect of drinks choice on caloric intake from food, the estimated effects varied significantly by demographic groups. In terms of gender and age, young male consumers tended to consume more calories from food when they drank diet than when they drank regular drinks. On the other hand, middle aged female consumers significantly consumed lower calories in food when they chose diet over regular drinks. Overall, we found significant net benefits (i.e., lower total calories from food and drink in a meal) from the availability of diet drinks even though young male consumers over consume on food when they chose diet drinks. This is because, in a counterfactual scenario, over-consumption of calories was mitigated by the benefit of forgone calories in a regular drink. In counterfactual analysis we also found that the net benefit was moderated by the size of drinks. For small drink size, the net benefit is insignificant for male consumers. The behavioral pattern we find conforms to the concept of highlighting/balancing effects in multipart consumptions (Dhar and Simonson 1999). In this case, we find that young male consumers ‘balance’ and middle aged female consumers ‘highlight’.
An Empirical Study of the Dynamics of Brand Building
Brand equity offers long-term benefits that are built over time. Therefore, brand equity is an inherently dynamic process. In this paper, we explore this dynamic process through a model of brand building and harvesting, in which firms invest in advertising in order to build and sustain brand equity. The model allows us to address several fundamental questions on the nature of brand-building and competition: How strong are the leading firm’s incentives to perpetuate its brand equity advantage? How strong are the follower’s incentives to overcome the gap it faces? When should firms harvest brands? How efficient is the conversion of advertising into brand equity and how quickly does brand equity depreciate? The model also enables a dynamic measure of the value of a brand to a firm that accounts for the effect of the brand on both current and future profits. We estimate this model using data from the stacked chips category in the consumer packaged goods (CPG) industry. The stacked potato chip market is ideally suited for this study because it is a duopoly that focuses a great deal on brand equity, displays interesting brand equity dynamics over time, and is characterized by very high levels of spending on advertising.
Linking Price to Profit: Theory, Extensions and Empirical Evidence.
How does one determine the effect of price changes on a firm’s profitability?
In this paper, literature on this issue is reviewed. The econometric literature suggest that the effect of price on profitability is small but statistically significant. Alternative analytical and statistical model lead to novel approach to predict effect of price changes on firm’s profitability. As a by-product of this work, it is possible to estimate price elasticity for a firm using publicly available income statements information. The random coefficient model resulted in on an average price elasticity of about -4.
Based on our estimate, we conclude that if a Dow 30 firm is raise price by one percent, then the average firm’s profitability would go down by about 1.5.